VirnetX Anything but a Marginal Market Problem

In the fall of 2008, Aubrey McClendon of Chesapeake Energy sold "substantially all" of his 33.4 million shares at a $2 billion paper loss after he faced margin calls related to loans he used to buy more of the Oklahoma City-based company's stock. That year, Chesapeake Energy disclosed that it gave McClendon a $75 million cash bonus. As of its 2011 proxy statement, Chesapeake Energy said it's banned the use of margin accounts by corporate executives.

"At least we know that they are learning from their mistakes," says Hodgson of GMI Ratings of Green Mountain Coffee Roasters and Chesapeake Energy's implementation of a retroactive prohibition on executive margin accounts.

Prominent proxy voting advisory firm Institutional Shareholder Services recommends to shareholders that they vote to remove the ability for top corporate executives to use their stock based compensation as collateral for margin accounts or personal loans.

"Generally vote FOR proposals seeking a policy that prohibits named executive officers from engaging in derivative or speculative transactions involving company stock, including hedging, holding stock in a margin account, or pledging stock as collateral for a loan," the ISS has advised shareholders.

ISS isn't overreacting in sounding alarm bells about this accepted practice. There aren't standard disclosures for such policies, which vary in the way they are reported from company to company. And even if a company states to its shareholders that margin accounts are prohibited and that stock sales, exceptions are rampant.

Meanwhile, a failure to comply with publicly stated corporate rules isn't necessarily a violation of securities laws. It means that companies may be marketing policies to investors that can be bent during a board vote and may not be enforceable under existing securities law.

The Dodd-Frank overhaul of securities laws gives investors the ability to advocate that violations of company policy -- such as Stiller's sale -- are a breach of federal securities laws. Currently, Section 955 of the 2010 Dodd-Frank Act requires that the SEC write rules for disclosures related to corporate policies on margin accounts, a task yet to be completed by the SEC, though an SEC spokesman said the regulator has existing disclosure laws related to executive stock holdings.